Mervyn King warns of new financial crisis

Mervyn King has also warned that the problem of banks being seen as “too big to fail” had not yet been resolved.

Mr King told today’s Daily Telegraph: “We allowed a (banking) system to build up which contained the seeds of its own destruction.”

He continued: “We’ve not yet solved the ‘too big to fail’ or, as I prefer to call it, the ‘too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.”

The Bank of England governor has addressed the question of “moral hazard” – the possibility that a bank behaves different because it is insulated from risk – on previous occasions. In 2009 he warned that the government decision to bail out British banks had “created possibly the biggest moral hazard in history”.

Responding to recent remarks by Stephen Hester, chief executive of the RBS bank in which the government holds a controlling share, suggesting that RBS should pay little tax and big bonuses, Mr King says: “Bankers were given incentives to behave the way they did. That’s what needs to change. We must resolve this problem.”

Truthful with the economicsWho Knows Who looks at the Bank of England governor and his monetary policy committeea as they tread a delicate path through a bumpy economic landscape.

In today’s interview, Mr King compares the banking culture of short-term profits and bonuses with that of traditional manufacturing industries, which he says operate in a more “moral” manner.

“They care deeply about their workforce, about their customers and, above all, are proud of their products. (With the banks) there isn’t that sense of longer term relationships,” he says.

Earlier this week Mervyn King expressed surprise that there had not been more public anger over spending cuts. He told the Treasury select committee: “The price of this financial crisis is being borne by people who absolutely did not cause it (…) I’m surprised that the degree of public anger has not been greater than it has.”

Last year the chancellor, George Osborne, announced that the Bank of England would from 2012 become Britain’s main banking superviser, replacing the Financial Services Authority.